Sunday, August 23, 2009

Follow up on debt-fueled consumption growth

Wow, this post got a lot of attention/criticism on the web (see comments on RGE Economonitor, Investment Postcards from Cape Town, and of course News N Economics). I guess it's hard to believe that the mortgage buildup over the last decade was financing health care rather than durable-goods consumption.

The chart illustrates annual real spending, as released by the BEA (see data here). The mortgage data comes from the Fed's Flow of Funds accounts. The BEA is smack in the middle of updating its history, following the comprehensive revisions, and some of the data is truncated at 1995.

I agree, but only to the point that the line dividing types of debt-fueled consumption growth is not clear - consumption was just growing. But I find this chart to be rather remarkable: notice how the trend term for durable-goods consumption growth peaks in the late 1990's, well before the run up in mortgage debt was established. Services got a bit of a push during the same period, but nothing like durables. And notice the positive correlation between some of the quicker rates of mortgage debt growth and the pace of health care spending.

Obviously this is not a quantitative study, rather a qualitative approach. But it does support the premise that the debt was going, at least in part, to finance health care spending. Frankly, I don't know why it is so hard to believe. Anecdotally, I have a friend that is just swimming in debt, all on an uninsured week at the hospital.

Rebecca Wilder


  1. I would guess mortgage debt would also track growth in real college tuition spending, which grows faster than health care expenses and nominally about twice the rate of inflation. As the cost of education spending shifts from government funding to student tuition costs, the increasing private burden of education may not show up as an overall increase in education spending in GDP numbers.

    The mortgage debt increase tracks the increase in real and nominal house prices. See:

    Part of the increase in mortgage debt is for home purchase price during the housing bubble and the other is probably cash out refinancing, as home values skyrocketed.

    Medical expenses will correlate with medical events and disabilities that decrease income, which will cause an increase in debt due to the loss of income and not due to the medical expense.

    Real health care spending increases includes government spending for Medicare, Medicaid, VA, employer funded health insurance premiums, etc. and would not cause an increase in personal mortgage debt.

    Anecdotally, I know of more people that increased their mortgage debt during the period for college tuition than for medical related expenses.

  2. Hi Milton,

    So good to hear from you! I am interested to know more about college tuition - is it a large share, though, of spending? Admittedly, the link between college tuition and debt would be more straight forward.



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